It’s never too early to start thinking about retirement, but there’s more to saving for later in life than pinching pennies and skipping coffee. Making smart investments matters, too. That doesn’t mean getting lucky in the stock market or picking the next big company, though any good portfolio has enough diversity to include some slightly riskier options. Growing your money smartly, however, requires something more stable — and that’s why you should open an IRA account. Nearly everyone can open an IRA, but not as many people know how to take full advantage of the benefits and possibilities that IRAs hold.
What is an IRA, and how does it work? If you find yourself asking, “Should I open an IRA?” then answering these questions should be your first task. Even if you’re familiar with your 401k program through your employer, there are several important differences to understand — especially when you’re wondering how you can make the most of both options. No matter how old you are, planning for retirement for the future is a good idea. So how can an IRA help?
What is an IRA?
Individual retirement accounts are just what they sound like: a private investment for an individual’s retirement. If that’s the case, what is the difference between an IRA and a 401k? 401ks, which are run by employers and funded from contributions that come out of your pre-tax paycheck. 401ks also often receive matching contributions from employers. An IRA, on the other hand, only receives the funds that you choose to contribute into it over time. 401ks tend to grow based on both contributions and the investment of that money into other funds on the market, while only some IRAs offer investment options. Others simply grow at a predetermined interest rate, meaning they yield a very safe and stable investment.
There are many kinds of IRAs, but there are two that stand out above the rest: these are traditional and Roth IRAs. In a traditional IRA, you defer income taxes on your contributions by using them as a deduction for the current tax year. Only when you retire and withdraw the funds will you pay tax on the money as income — ideal for when you need to lower your tax burden today but perhaps not in the future.
A Roth IRA, on the other hand, does not offer you any immediate tax benefits. You won’t receive a current-year deduction for any contributions to a Roth IRA. On the other hand, though, you will be able to withdraw the funds in retirement completely tax-free. If you can afford to handle your full tax burden in the present, your future self may be thankful when you need every dollar in your retirement. Which option is right for you is heavily dependent on your circumstances today, your available funds, and how you’d like to plan for retirement. There may be other types of IRAs more suitable for your case, too — a discussion with a financial professional can illuminate which options are best.
When — and Where — Should I Open an IRA?
When is the right time to begin contributing to an IRA? A better question might be this: is there ever a wrong time to invest in an IRA? In other words, you should feel confident that putting money away into your retirement accounts is always a good idea. This is especially true for a traditional IRA since it allows you to take what could amount to a substantial tax deduction each year you make contributions. Plus, since you’re earning interest every year that compounds as it grows, the sooner you begin making investments, the more money you will end up with once you reach retirement age. While there are some limits — those over 70 can no longer contribute to traditional IRAs in the same manner — you should strongly consider opening an IRA whenever you can make contributions separate from what you need for expenses.
The question of where you should open an IRA is trickier to answer. If you want to engage in more high-risk retirement investments by putting the funds in your IRA on the line in the market, you’ll have to work with a brokerage. Otherwise, your options boil down to banks and credit unions. With banks, you may have more access to some options, such as Roth IRAs, but the rates you receive may not be very competitive. With a credit union, such as Resource One, you can tap into more versatile IRA products with better rates and a lower overall level of risk. Credit unions are non-profit ventures, after all, so you do not need to worry about a fund manager gambling with your retirement — and losing. Instead, you can safely watch your money grow over time.
How Much Should I Contribute to My IRA?
As much as you can! Obviously, you should not put yourself in a position where it is difficult to meet your obligations, but stashing away whatever you can afford into your IRA is a good idea no matter how old you are. Ideally, you’ll want to make bigger contributions earlier in the year so that you can take home more pay the rest of the time. For many, that’s not an option, so consider making weekly or monthly contributions on your own to an IRA. The numbers may seem small at first, but they’ll grow more quickly over time.
The government does place some limits on IRA contributions, in part to ensure that the ultra-wealthy do not abuse the tax benefits of retirement savings. What is the maximum contribution to an IRA, then? For the average individual in 2019, the maximum level was set at $6,000. Married couples can contribute double that, with up to $12,000 saved each year. In most cases, that maximum amount is entirely tax-deductible when the time to file comes around, but you’ll want to speak to your personal tax advisor or accountant to take full advantage of these benefits.
IRAs versus 401ks: Important Questions and Answers
What if you’re already saving through a 401k? This is a tricky situation that many workers find themselves in today as employers abandon pensions in favor of matching 401k contributions. Here are a few quick answers to the biggest questions most
Should I open an IRA if I already have a 401k?
Yes! There are no inherent downsides to having money in both types of retirement accounts. In fact, you could consider a way to spread out and reduce your risk. While your 401k responds to movements in the market, your IRA grows at a stable rate you can count on — so you’ll always have a safety net in place.
Should I max out my 401k contributions, or open an IRA instead?
It depends on your employer and their policies surrounding matching contributions. If you do not receive any employer match at all, you may want to spread your investment between the two based on which will offer a better rate of return. If your employer will give you the same amount of money you put in, however, consider pegging your contribution to that maximum. Only put into your 401k what your employer will match, then put the rest into an IRA.
Should I use an IRA to help receive deductions on my current taxes?
As mentioned, you can use an IRA contribution to reduce your reported income at tax time, taking a deduction that helps offset the loss of access to the funds you’ve secured for the future. If you have a high tax burden right now, this is a good idea. However, keep in mind that the IRS sets a cap on how much an individual can earn in a year while still claiming IRA deductions. In 2020, deductions are not available to individuals earning more than $124,000. Check IRS guidance and consult with your accountant before making a decision regarding taxes.
Find Out More About Your IRA Options with Resource One Credit Union
Both 401ks and IRAs have pros and cons that you’ll need to balance with your own personal goals for retirement. One thing is for sure: saving anything is better than saving nothing at all. At your local Resource One Credit Union near Dallas, you’ll find friendly professionals ready and waiting to help you explore all your options in-depth. With more attentive customer service than you’ll receive at one of the big banks, plus more flexible options geared towards investors like yourself, Resource One is the perfect place to begin your journey into retirement savings with our CD and IRA solutions.
Why keep stuffing paychecks under the mattress when you could make that cash go to work for you instead? Don’t put it off — the sooner you start to save, the more you can accumulate in time to make your golden years that much more secure. Find out more about your IRA options today at one of Resource One Credit Union’s convenient locations in the Dallas area, or contact us online to start a digital conversation about how to allow your money to grow in a safe place for the future.